TRW Automotive Holdings Corp. (TRW) Q3 2014 Earnings Conference Call October 28, 2014 8:30 AM ET
Executives
Mark Oswald - Investor Relations
John Plant - Chairman of the Board, President, Chief Executive Officer
Joe Cantie - Chief Financial Officer, Executive Vice President
Analysts
Ryan Brinkman - JPMorgan
Michael Ward - Sterne, Agee
Ravi Shanker - Morgan Stanley
John Murphy - Bank of America
Operator
Good morning. Welcome to the TRW Conference Call. All lines have been placed on listen-only mode. As a reminder, this call is being recorded.
Presentation material for today's call was posted to the company’s website this morning at trw.com/results. Please download the material now if you have not already done so.
After the speakers' remarks, there will be a question-and-answer period. Due to today's limitation on time, the company requests that participants limit follow-up questions to one per caller. (Operator instructions)
I would now like to introduce your host for today's conference call, Mark Oswald, Director of Investor Relations. Sir, you may begin.
Mark Oswald
Thank you. Good morning. I would like to welcome everyone to our Third Quarter 2014 Financial Results Conference Call.
In light of the circumstances regarding the pending ZF transaction, we have planned our call today to be slightly shorter than usual and expect to conclude the call by 9:15 am.
This morning, as usual, I am joined by John Plant, our Chairman and Chief Executive Officer; and Joe Cantie, our Chief Financial Officer.
On today's call, John will provide an overview of the current automotive environment and its impact on TRW. John will also provide a brief summary of the financial results and discuss other related business matters, including our outlook for the remainder of the year.
After John's comments, Joe will provide an expanded review of the financial information. At the conclusion of Joe's comments, we will open the call to your questions.
Before I turn the call over to John and Joe, there are a few items I would like to cover. First, today’s conference call will include forward-looking statements. These may include statements concerning the expected timing, completion and effects of the pending ZF transaction in our best and current expectations and various assumptions and therefore involve risks and uncertainties.
I would caution you that our actual results could differ materially from these forward-looking statements made on this call. In connection with the pending ZF transaction, the company has filed a definitive proxy statement with the SEC on October 20, 2014.
Stockholders are urged to read the definitive proxy statement and any other relevant documents filed with the SEC, because they contain important information about the pending ZF transaction.
Please refer to Slide 2 of the presentation for a complete Safe Harbor statement.
The Risk Factors section of our 2013 Form 10-K and our 2014 first and second quarter 10-Qs contain additional information about risks and uncertainties that could impact our business.
You can access a copy of our 2013 10-K and 2014 quarterly filings along with the definitive proxy statement by visiting the Investor Relations section on our website or through the SEC's website at sec.gov.
The directors, executive officers and certain other employees of the company may be deemed participants in the solicitation of proxies from stockholders of the company in favor of the pending ZF transaction. You can find information about the company's executive officers in the definitive proxy statement.
On a related matter, we expect to file our third quarter 10-Q within the next day or so. Once filed, the 10-Q can also be accessed through either website.
In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials, which are posted on Investor Relations section of our website.
Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our release this morning. We have not given our permission for any other recording of this call and do not approve or sanction any transcribing of the call.
This concludes my comments. I will now turn the call over to John Plant. John?
John Plant
Thank you, Mark, and good morning everyone. I am pleased to report TRW made progress on several fronts during the third quarter. There are a number of business developments that I plan to comment on, but first let me start with the earnings.
As you can see from the solid financial results posted this morning, TRW continue to build on the positive momentum established earlier this year.
During the quarter, sales which totaled $4.2 billion were down slightly compared to the prior year quarter. Adjusting for the effect of existing certain of our upgrade components and module businesses, sales were up 3% year-on-year. This improvement continues to demonstrate increased demand for TRW safety technologies.
Operating profit and margin before special items was $340 million and 7.6%, respectively. Net income before special items was $205 million and earnings per share were $1.75, an increase of 15% compared to last year's third quarter earnings of $1.52 per share.
Finally, in line with the company expectations, TRW generated cash from operations of $207 million during the quarter. TRW's third quarter performance built on the first half results to provide a solid foundation for TRW to achieve its full year goals.
I will expand on our year-to-date results in just a few minutes, first, just a few additional comments on the third quarter.
In North America, vehicle production track generally in line with the expectations, which industry observers established at the beginning of the quarter.
Overall North American production was up 8% compared with the third quarter of 2013. Within the quarter's vehicle build, production growth for the Detroit's three manufacturers lacked the region's overall growth advancing 3% year-on-year, a significant model changeovers impacted production levels.
Consumer demand in North America remains robust and supports the current level of production. The third quarter seasonally adjusted selling rate averaged about 16.7 million units.
In Europe, the industry sales were mixed. New vehicle registrations in Western Europe have stabilized in the mid-12 million unit range and supports the current level of production, whereas weakness in Russia and Ukraine have resulted in production cuts in Eastern Europe.
For the quarter, total European vehicle production at 4.5 million units was down about 1% compared with the last year's third quarter. Western European production was up modestly year-on-year at 3 million units.
Despite new vehicle registrations in Western Europe stabilizing in the mid-12 million unit range, we remain cautious on whole for the region.
In China, vehicle sales and production continued to trend higher. However, signs of softening emerged as the pace of growth moderated as the quarter progressed.
With respect to year-to-date results, we remain solidly on track. Sales totaled $13.2 billion, an increase of 2% compared to the same period last year.
Adjusting for exited businesses, sales were up 7% year-on-year. Operating profit before special items for the first nine months of the year was $1,031 million, resulting in operating margin of 7.8% a good outcome as we continued to invest to support our future growth.
Net income on the same basis were $619 million and earnings per share were $5.97, a increase of 16% compared to last year's year-to-date earnings of $5.05 per share.
Moving onto the third quarter business developments, starting with the most significant development as you are aware the company announced that it entered into a definitive agreement with ZF, under which ZF will acquire all of the outstanding shares of TRW for $105.60 per share in an all-cash transaction, valued at approximately $13.5 billion on an enterprise value basis.
We believe that this transaction represents an opportunity to provide shareholders with full and certain value. The acquisition price represents a premium of approximately 16% and 15% over TRW's undisturbed closing stock price of $91.40 on July 9, 2014, and the undisturbed all-time high price of $91.62 on July 7, 2014, respectively.
In terms of evaluation, the acquisition price of $105.60 per share values TRW at the multiple of approximately 7.6 times enterprise value to adjusted EBITDA.
We believe that ZF is offering TRW stockholders outstanding value. The transaction has been unanimously approved by TRW's Board of Directors and ZF supervisory and management boards, and a subject to approval of TRW stockholders as well as customary closing conditions, including antitrust and CFIUS clearance.
With regard to stockholder approval, November 19, 2014 has been established as the date for the special stockholder meeting. Additional details related to the transaction were included in the merger agreement under definitive proxy statement filed with the SEC.
An additional M&A development also occurred during the quarter as the company announced it signed a definitive agreement to divest its engine valve business to Federal-Mogul
In addition to clarifying the company's product portfolio, the planned sale which is expected to close in the first quarter of 2015, will enable the company to concentrate on its growing active and passive safety technologies.
The engine value business is a longstanding market leader and trusted partner of the world's vehicle manufacturers. It's pairing with Federal-Mogul's powertrain business will further strengthen its position as an industry leader.
Although a lot of effort went into finalizing the agreements with ZF and Federal-Mogul, rest assured the company remains focused on running the business.
Product launches during the quarter continue to strengthen TRW's diversity and leadership in intelligent safety solutions. A few examples include TRW's electric steering, passenger airbags, seatbelts and foundation brakes on the Ford car in South America.
Chrysler launched its Jeep Renegade in Europe with TRW's forward-looking camera, electric power steering, passenger side and knee airbags, seatbelts and slip control.
Opel launched its Vivaro in Europe with TRW's driver curtain and side impact airbags, seatbelts steering wheel and electric hydraulic steering. Products launched during the third quarter were delivered with world-class quality as a result of our ongoing quality programs.
For the first nine months of 2014, our quality averaged just under four PPM across all products and customers.
Lastly, on the subject of our developments, the company continues to review our pension plans in the U.S., Canada and the U.K. to ensure that we are managing our obligations and costs appropriately.
During the most recent quarter, we initiated actions in Canada and the U.K. to permanently abate obligations with the most significant actions being targeted towards the U.K. plan.
We expect the recently launched programs to be substantially complete and accounted for in the fourth quarter of 2014 and funded predominantly with pension plan assets. A certain level of cash contributions will be required by the company to facilitate the projects.
Before I turn the call over to Joe, let me comment on our expectations for the remainder of 2014. Overall, vehicle production forecasts have remained relatively stable since our last conference call.
In North America, fourth quarter production is estimated at 4.2 million units, up approximately 4% compared to last year. On a sequential basis compared to the third quarter this year, production is expected to be relatively flat.
Within the overall estimate for North America, Detroit Three production is expected to be about 2.2 million units, down 3% year-on-year, as significant model change efforts continue to influence near-term production.
For the full-year, we expect North American production to total 17 million units, up about 5% compared with 2013.
In Europe, despite the signs that industry has stabilized in the major Western markets, we remain cautious on near-term vehicle production and continue to believe that recovery will be gradual.
For the fourth quarter, vehicle production in Western Europe is projected to be about 3.2 million units, up about 3% compared with last year. Total European production for the fourth quarter is forecasted at about 4.9 million units.
For the full year, our forecast for production is 19.9 million units for total Europe, up about 2% compared with last year. Within this estimate, Western European production is expected to be 13.2 million units.
Beyond North America and Europe, we expect full-year production levels to increase in China, although the pace of growth most likely will moderate compared with last year.
In Brazil, negative economic conditions continue to place downward pressure on vehicle demand and production. As a result, vehicle production is expected to fall about 13% compared to last year.
As you would expect, we will continue to monitor the global environment and make additional adjustments to our operations as necessary.
Based on the forecasted production estimates, currency assumptions and our performance through the first nine months of the year, we now expect 2014 sales to be approximately $17.4 billion, slightly lower compared to the guidance we provided in July, primarily due to currency headwinds.
Capital spending for the year is now forecasted to range between $700 million $730 million as we build out our infrastructure in strategic high growth areas such as China and in support of the continued expansion of our new technologies.
This updated range for capital spending is slightly lower compared with our previous guidance due primarily to timing of certain products have been re-calendarized into next year.
Despite his level of capital spending and consistent with prior years, TRW expects to continue to its trend of cash generation from operations in 2014.
Finally, with regards the restructuring, we expect 2014 restructuring expense to be about $80 million, above our previous guidance as we continue to improve the competitiveness of our business in Europe.
In summary, we are pleased with the performance for the first nine months of the year and remain committed to finishing a strong year.
With that, I will now hand the call over to Joe to discuss our financial results in further detail.
Joe Cantie
Thank you, John. Good morning to everyone. As John mentioned earlier, despite the enormous efforts involved in the two M&A transactions we have process, TRW remains focused on running the business and that third-quarter results demonstrate that focus.
We had a good quarter on many fronts. A quick recap of the key highlights for the quarter include sales of $4.2 billion, an increase of about 3% compared with the same period last year, adjusting for exited businesses.
We had an operating profit margin of 7.6% after excluding restructuring deal-related charges, which compares to 7% in the prior year third-quarter.
Earnings per share were $1.61 on a GAAP basis. After excluding the special items, earnings per share were $1.75 which is an increase of 15% compared to last year.
Finally, the company generated cash from operations of $207 million during the quarter an increase compared to the previous year. As you might expect, we are pleased with our performance for the quarter and through the first nine months of the year.
Our focus is now on fourth-quarter performance in order to finish the year strong. I will expand on our full-year outlook shortly, but first a few words on the third-quarter results.
I will start with the income statement. For the quarter, we reported sales of $4.2 billion, down slightly compared to the same period a year ago. Currency translation had a slight positive impact on sales of approximately $8 million during the quarter as the euro to dollar exchange rate, which averaged 1.33 this quarter, was consistent with last year's level of 1.32.
As we move forward, I expect the recent volatility in exchange rates to have a negative impact on our near-term results both, sales and profitability. As an example, the average euro to dollar exchange rate in last year's Q4 was 1.36 compared to today's spot rate of 1.27.
Returning to Q3, excluding the effects of currency and the negative impact of about $192 million in lost sales related to the exit of certain of our brake and module businesses in North America, sales increased about 3% compared with the previous year, with increases in each of our major geographic markets.
For the quarter, we had an operating profit of $291 million compared to $289 million in the 2013 period. Included in both the 2014 and 2013 third-quarter operating profits, were restructuring charges of $10 million and $5 million, respectively.
Also included in the third quarter of 2014, were charges related to the two pending M&A transactions totaling $13 million. Excluding these charges from both periods, operating income was $314 million in the third quarter of this year compared to $294 million last year.
The higher level of profit was driven by a combination of a favorable mix of products sold, the positive impact of currency movements between the two periods and timing of cost reduction actions, partially offset by approximately $10 million in planned cost increases to support our future growth.
Moving down the income statement, interest expense totaled $25 million below yet last year's level of $33 million. Finally, tax expense was $80 million in the current quarter compared with $62 million last year.
Both the 2014 and 2013 periods included tax benefits relating to special items, totaling $7 million and $15 million, respectively.
For the quarter, our diluted share count averaged 117.8 million shares, which is 6.4 million, lower than last year reflecting our share repurchase programs.
At the bottom-line, we posted GAAP net earnings of $1.61 per diluted share compared with the $1.60 in the same period last year.
Excluding the effects of special items from both periods, earnings were $1.75 per share this year as mentioned previously, up 15% compared with last year's third quarter earnings of $1.52, which highlights the solid quarter we had and the impact of our repurchase programs.
Moving on to a brief review of our results for the first nine months of the year, we reported sales of $13.2 billion, which is an increase of $252 million compared to the previous year.
Excluding the effects of currency and the negative impact associated with exiting certain of our brake and module businesses, sales increased about 6% compared with last year's period.
Excluding restructuring charges and other special items mentioned earlier, our operating income for the first nine months of 2014 was over $1 billion resulting in a margin of 7.8%, which compares to 7.5% last year.
The year-on-year margin improvement was primarily driven by the associated profit from the higher level of sales, partially offset by planned increases in costs to support future growth.
At the bottom-line, we reported GAAP net earnings of $5.56 per share. Excluding special items, earnings were $5.87 for the nine-month period this year, up over 16% compared with last year's net earnings of $5.05.
The diluted share count underpinning the earnings per share averaged $118.3 million shares through September, which is $7.3 million lower than last year. Again, reflecting our shared repurchase programs.
Let me shift now to our cash flows and capital structure. First, on cash flow, for the quarter operating cash flow was $207 million, which compares to $147 million in 2013.
Capital expenditures for the current quarter were $118 million compared with $140 million last year.
Free cash flow, which I am defining as operating cash flow less capital expenditures was $89 million this quarter compared with the prior year level of $7 million.
For the nine-month period, we had free cash outflow of $73 million compared to an outflow of $171 million in 2013. Capital expenditures at $354 million during the year-to-date period were $57 million lower compared to last year's level.
Despite the cash outflow through September, which is consistent with our projections in normal seasonality, the company continues to expect the positive operational cash flow result for the full year.
At the end of the third quarter, our totaled gross debt was $1,725 million while net debt outstanding was $910 million.
Net debt increased from the position at the end of the year, essentially by the $400 million of cash used to repurchase shares, plus the $73 million of cash outflow during the first nine months of the year.
As far as an update on our share repurchase programs, in August, the company completed the $400 million accelerated share repurchase program that was initiated in the first quarter.
The total number of shares repurchased was just over 4.5 million. Since initiating our share repurchase programs in 2012, the company has returned approximately $1.2 billion to shareholders through share repurchases.
Although the company has approximately $1.1 billion in remaining repurchase authorization, the program is restricted pursuant to the ZF merger agreement.
Other potential uses of cash such as significant pension abatement actions for our U.K. pension plan remain under consideration and most likely will occur in the fourth quarter of this year.
Company contributions for the abatement projects will ultimately depend on several factors, including the actual participant take-up rates. However, our best estimate at this time is approximately $300 million.
Switching subjects now to the remainder of 2014. As John indicated, TRW's full-year 2014 production forecasts are for $17 million units in North America, $19.9 million units in Europe and continued growth in China.
Based on these production levels, updated currency assumptions and our performance for the first nine months of this year, full-year 2014 sales are now forecasted at $17.4 billion, slightly lower compared with the guidance provided to you earlier this year.
This level of sales for the full-year implies fourth quarter sales of approximately $4.2 billion, which is below last year's fourth quarter. The negative impact of businesses exited and currency headwinds are the primary drivers of the year-on-year decrease.
I would like to point out that currency is expected to negatively impact the comparison to last year's fourth quarter by about $130 million.
We expect capital spending to be in the range of $700 to $730 million in 2014, down slightly from the guidance provided in July. Again, as John mentioned, the lower spending level is due to several factors including timing.
Ancillary costs associated with our growth plans, namely engineering, development and infrastructure costs, are tracking as planned at about $45 million for the full-year.
I will also remind you that as a result of our increased CapEx over the previous few years, depreciation expense is also tracking higher for the year at about $25 million to $30 million. This is slightly less than our previous guidance, primarily due to be announced divesture of our engine valve business.
Moving on, at this point, we expect commodity prices will remain neutral for the remainder of this year. Restructuring expense for the full-year will likely come in at around $80 million.
An interest expense is forecast about $110 million for the full-year based on the current level of gross debt and expected cash flows.
Finally, given our expected results by geographic location, you should continue to assume a full year 2014 effective tax rate of between 27% and 29% for modeling purposes.
In closing, we are pleased with our performance posted during the first nine months of the year. However, as I mentioned at the start of my comments, we realize we have work to do to ensure the company achieves its 2014 objectives.
Before we moved to the question-and-answer portion of the call, I would like to remind everyone that we are in the solicitation period. As a result, we cannot comment on the status or answer questions related to the pending ZF transaction.
John and I will be happy to take questions specific to our third quarter and year-to-date performance.
With that, operator, can we have our first question?
Question-and-Answer Session
Operator
Yes, sir. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. (Operator Instructions).
Our first question comes from Ryan Brinkman with JPMorgan.
Ryan Brinkman - JPMorgan
Hi. Thanks for taking my question. I am curious if your passive safety bookings have improved in the wake of developments set up [competitor] are you seeing any change in your business win rate?
John Plant
I think it's probably a little bit earlier for that at the moment, Ryan, but the most concrete examples so far has been we have received an inquiry, in fact, directly from our competitor to see whether we would be prepared to supply them when inflate to - is assist them. Of course, we are willing to do that to help them and help the industry failed to move past what they are currently experiencing, because our customers. We will clearly welcome that support.
The dynamic of course is potentially favorable, but at the moment I can't point to anything specific in terms of contracts which we have the purchase order in hand for at this point in time.
Ryan Brinkman - JPMorgan
Okay. Great. Just last question. I think your electronics sales grew at roughly 30% pace in the first half of the year. That you update that in the Q. I presume this captures a lot of bit active safety products that you have introduced. Can you quantify how you tracked in 3Q relative to - are your active safety sales growing more quickly and in the back half of the year than in the first half? Thanks.
John Plant
I will ask Joe to look at while I talked. I mean, I don’t track in terms of my mental roadmap quarter to quarter, but the basically year on-year the level of our sales is increasing substantially between '13 and 14 and we are seeing another substantial increase as we moving to '15 and '16 and beyond.
At the moment everything is in a good order and we feel as the positive momentum which we have indicated before is certainly there and it is possible that the developments will reinforce that and make it a high growth in the future.
Joe Cantie
Ryan, you are right, when we file our Q, obviously, we will report the segments in there, but you will see that we had another strong quarter in our electronics division for the nine months this year compared to last year our sales are up about 25%. For the third quarter, our sales are up about 30% net segment. That does captures the dash - the camera business, but also the electronics pertaining to our steering and braking businesses as well. That segment obviously is highest growth driver of our results both in the third quarter and for the year-to-date period.
Ryan Brinkman - JPMorgan
Great. That's helpful. Congrats on the quarter.
John Plant
Thank you.
Operator
Our next question is from Michael Ward with Sterne, Agee.
Michael Ward - Sterne, Agee
Thank you. Good morning, guys.
John Plant
Good morning.
Michael Ward - Sterne, Agee
How was the China revenue performance in the quarter?
John Plant
We actually had broken that down into two elements, Michael. The manufactured part of it, which is very healthy grows, that double the increase in vehicle sales, so that is very healthy.
One area where we were significantly below the Chinese vehicle builds was that pertaining to modules. That was very specific to one of our customers, which was FAW VW, or they were undergoing very significant changeovers to their [model] lines, which require them to take basically 22 days out of the quarter.
For example on the Audi Q5 and Audi A4 to make basically provide for capacity increases in the future, few other extra days on other modules, other models that were taken out by that same custom in the quarter, so we have a very specific quarter revenue hits which is fact. Essentially it has all to with providing the ability to ramp production up to an even higher level during 2015.
Joe Cantie
Even with that, Mike, for the year-to-date period nine months, our sales are well over 2 billion and we are up double digits compared to last year and our sales in China in the third quarter, despite the module timing that John talked about, were still increased versus the previous year as well. All things are going fairly well in China for us.
Michael Ward - Sterne, Agee
Okay. Then on the pension abatement, is there any impact on the operating results?
Joe Cantie
Yes. There will be accounting effects related to it in the fourth quarter. If successful depending on the take-up and the size, there will be a charge, a non-cash charge relating to the asset that we carry on the balance sheet that gets proportionately written off, so that will be a one-time charge that occurs in the fourth quarter.
Then obviously on a go forward basis, the pension income related to that U.K. plan would be proportionately sized depending on the size of the abatement, so there will be a number of, what I will call more accounting related rather than economic or cash-based things that will occur and we will obviously walk you through that when we go to the abatement in the fourth quarter.
Michael Ward - Sterne, Agee
Okay. Thanks.
John Plant
Just to give you a background, Michael, I mean, the whole reason behind this is that we - I will say reducing our gross liabilities and increasing those steps each and every year. This is going to be the most significant step that we envisage and really carving out some very significant thinking the $1 billion-plus level, basically liability management and therefore reduce the future volatility of our balance sheet.
Michael Ward - Sterne, Agee
Absolutely. Thank you, gentlemen. I appreciate it.
John Plant
Thank you.
Joe Cantie
Thank you.
Operator
Our next question is from Ravi Shanker with Morgan Stanley.
Ravi Shanker - Morgan Stanley
Thanks. Good morning, everyone.
John Plant
Good morning.
Ravi Shanker - Morgan Stanley
John and Joe, we spoke earlier this year around January or so. You were indicating that there was some hesitation on both your part and the part of some of the OEMs to kind of jump into autonomous with bullet feed just wondering where that technology is going to go in the long run.
In the 9, 10 months since then has anything really changed? Are the automakers kind of any more confident towards the commercialization of the technologies? Do you think things are moving faster or slower? Any update you can give us there.
John Plant
I think the path that I have outline, as I will say my personal view is still very much intact which is there are many stages that we will see on the development towards a future autonomous vehicle.
The most significant ones initially by some form of sensing mechanism for warning, whether it's lane departure warning or collision warning. Now, of course, we have already bringing into production automatic emergency braking capabilities to the vehicle.
We are sensing via the camera or the radar an impending frontal collision and therefore applying the brakes automatically which is obviously building value for those very sophisticated sensors of radar, camera, the fusion thereof and the backing of those in to examples of brake system and the engine management system.
We have already demonstrated collision mitigation capabilities through our steering business, albeit we have not yet fitted any of that into a production environment.
I see these developments continuing as an evolution, so I do think that at point in time there will be opportunities for us to I will say disengage from the driving process, so that may be we will be able to turn our attention to text or e-mail at some point and take over the driving experience during the course of that journey.
I am not yet convinced that we will see a fully autonomous vehicle on the road by 2020, which has been a date thrown out there by some commentators. Basically, because I think there are many things, which are yet to be overcome in terms of the legal, insurance, liability management issues.
Assuming those get done, I think that will obviously pave the way to being able to deploy this technology. Either way I think the increasing interest from not only from the European, I'll say, rule makers [European] which is in the 1780 timeframe, but also now from the US regulatory authorities including - I think they are seeing increased value from some of these technologies maybe there will be future rulemaking. It is unclear at this point.
I think we are on a journey. I think it's a very, I will say, actively studied topic both, by ourselves and the vehicle manufacturers. We see that the market is opening, is developing and is very encouraging, but I'm not yet at the point of saying definitively that we will autonomous vehicles on the road by the above timeframe that was suggested.
I mean, it will happen. The question is when.
Ravi Shanker - Morgan Stanley
Got it. Just the follow-up to that, do you the new combined entity is probably going to see that as a biggest opportunity or the biggest focus area or growth area for the business going forward?
Also, what has been the OEM or customer reaction to the combined entity?
John Plant
I have seen reports saying positively about the customary action to the future combined entity in terms of the breadth of capability that the company will have, so I find that very encouraging and a very positive and reinforcing step to the vision that has been laid out.
I have actually forgotten the first part of your question.
Ravi Shanker - Morgan Stanley
Is the autonomous opportunity going to be the biggest growth driver or big focus area for the combined entity going forward given that? It doesn't make a more logical sense.
John Plant
I think there are many steps along the way. For example, in terms of let's call it a safety domain ECU, which we did recently for one German customer, that actually axis and all be between, say, the break slip control system that we provide, the I call it the transmission system which ZF provide and then the steering system and the suspension electronic control systems, so there are many, again, steps along the way to that autonomous vehicle which provides value and enhanced opportunities for the combined entity. I don't think it's just a matter of there will be an autonomous vehicle.
I think are many opportunities for wider systems, provision, interfaces and the budget to provide, I would say, being an intellectual partner with our customer on a broader basis, so I think it's just the autonomous is one step amongst the huge suite of products that will be potentially available to them in the future. Therefore, it will be a good thing, I will say, I think each and every year along the way.
Ravi Shanker - Morgan Stanley
Understood. Thanks and good luck for next month.
John Plant
Thank you.
Joe Cantie
Thank you.
Mark Oswald
Mandy, with that, I think, we have time for one final question.
Operator
Yes, sir. Our final question is from John Murphy with Bank of America.
John Murphy - Bank of America
Good morning, guys. I will keep it to one here. Just on Europe, obviously, there is a lot of macro concern and there is risk emanating out of Russia that could [whole] Eastern European market. Who knows exactly how that's always going to play out there, but it looks like schedules and volumes are still holding up reasonably well and not falling off a cliff, but there was this constant concern.
Are you see anything in schedules or inventory that would give you some concern around that market or this commentary really sort of around the sort of larger esoteric macro risk?
John Plant
I think you got to see it in a much broader context, which is everybody I think began to believe towards the end of the last year that Europe would pick up in the back half of 2013, which there was some evidence of that, particularly in the December timeframe and that moved into the start of this year.
Clearly, the positive momentum has probably has not been as great as people thought. While there has been an increase and it is a welcome increase that have been, I will say, geopolitical overtones of the Ukrainian, let's call it, crisis that have played into this to some degree.
I think it has taken something out of the total volume for Europe and therefore a dampening effect. I am hopeful of those specific concerns begin to abate and the underlying momentum will continue into 2015 and beyond in a very steady measured way.
I think there may be a quarter where you might see a slight production reduction, because of any corrections to align with the overall, I would say, market dynamic, but essentially I think the long-term or medium-term trend is that Europe is going to recover.
The level of - production of sales has been so low for so long and you see certain countries beginning to, I will say, have sales increased like Spain has become stronger, which is one of the early countries into the dramatic recession, you see Greece getting a bit better, the U.K. is bit strong, you see it a little bit stronger in France last months.
I think, overall, the trend is there, and absent any dramatic developments, I would say, particularly with the tension around the Ukraine, which I think are abating then I expect positive things into the future.
John Murphy - Bank of America
Stagnation risk as opposed to drop off risk, is it a fair way to characterize it?
Joe Cantie
Yes. I don't see drop off risk. I see the stagnation risk, but that's not my planning assumption. I think, we are going to see a small steady increases year-on-year for the next two to three years now.
John Murphy - Bank of America
Okay. Thank you very much.
Joe Cantie
Thank you.
Mark Oswald
Operator, if you can please move to conclude the call?
Operator
Yes, sir. This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.
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